A welcome development to Kuwait's BOT law

28 March 2008
Changes to Kuwait's build-operate-transfer law should give a much-needed boost to the state's construction industry, but contractors are yet to be convinced.

Unlike the progressive, rapidly modernising construction sector in nearby Dubai, Kuwait's construction industry has been hampered by stifling bureaucracy and an inflexible regulatory environment. Contractors and developers have become reluctant to enter into contracts as rising costs, greater financial risk and a lack of skilled labour hinder development.

This has resulted in several high-profile projects in the state being suspended or undergoing significant delays and redesigns. Salmiya Park, Failaka island and the Subiya causeway are just three examples of projects that have been adversely affected by such factors. All of which makes Kuwait's new build, operate, transfer (BOT) law, which was approved by parliament in January, so welcome.

Previous legislation stipulated a maximum BOT concession period of 20 years, a timeframe that was often considered commercially unviable. Under the new law, this has been extended to up to 40 years for larger projects.

Regaining confidence

“If you have a maximum of 20 years for a multi-million-dollar project, and it is going to take you 10 years to build it, how are you going to pay for it and make a profit?” asks Jeff de Lange, deputy managing director of local architecture and engineering consultant Gulf Consult.

The new law also offers greater clarity, with all BOT projects to be co-ordinated through a new body, the Central Authority, under the chairman-ship of the Finance Ministry, regardless of size, type or whether the project is on behalf of a public body or private company. “It provides an open-ness of process, consistency, one central organisation and a much more realistic approach to the duration and time of the lease,” says De Lange.

The new BOT law requires that a public shareholding company is created for new projects, with shares held by the government, project instigator and members of the public.

However, local contractors are unsure how the legislation will impact on the sector. “The original law was more like a guide between you and the government, which was one of its main failings,” one contractor tells MEED. “Now they are trying to regain the confidence of the investor with the establishment of these stiffer rules. But it is still too early to comment as you cannot visualise what they are up to.”

The new law will not come into effect immediately following its approval in parliament. The Central Authority must be put in place to implement the law, to be co-ordinated by the Finance Ministry, which could take several months. De Lange says there is no sign of an imminent decision but he is hopeful it will be later this year.

Political unrest in the state could delay this decision even further. In March, all 14 members of the cabinet resigned because of widening disharmony between parliament and the government branches, forcing fresh elections.

“It will slow down BOT, that is certain,” says another local contractor. “But even the new format will not be as helpful as people think. The main problem [with the old BOT law] was communication between the Finance Ministry and the real estate developers or contractors.

“It is still not clear how the new law will work and people are not very optimistic. What you need is a clear idea of what everyone is doing, but it is not defined. It is a step in the right direction, but communications need a lot more work.”

Augusto Morais, assistant development manager with the local Mushrif Trading & Contracting Company, also says the law will make little difference to the sector, regardless of when it is applied. “It is not going to have any impact,” he says. “Laws have been introduced before, decisions have been made but then nothing happens.

“The system here does not think towards development. It is not like Dubai, which considers development and plans for its people and the future. Kuwait is still riding high on oil and is not looking past that. [The government] is not thinking of the future.”

BOT has proved a popular procurement strategy in the past for the Kuwait Municipality. Facing a shortage of funds and manpower expertise following the end of the Iraqi occupation, the state turned to the BOT model and the private sector to complete the landscape development of the 25-kilometre-long corniche between 1991 and 2000.

Since 2000, the municipality and other government bodies have used BOT as a way of providing potentially non-profitable public facilities at no cost to the state.

Projects carried out under the BOT model include the expansion of the passenger terminal and provision of multi-floor parking for the Directorate General of Civil Aviation (DGCA), the general aviation terminal and associated apron for DGCA, and the redevelopment of the Ahmadi township for Kuwait Oil Company (KOC).

However, De Lange, speaking at MEED's Kuwait Conference in February, highlighted several examples that demonstrate the limitations of the existing BOT law, and its consequences. Salmiya Park is a 333,000-square-metre recreational park connected with a railway being developed by the Public Authority for Agricultural Affairs & Fish Resources. Problems arose over restrictions on land use by the municipality, delays with the site handover and the BOT lease period of 20 years, which developers considered insufficient.

Plans for the tourist destination of Failaka island faced similar problems. The client, the Mega Projects Agency, required bidders to stick rigidly to its master-plan, while the cost of bidding itself made little financial sense. Each consortium had to spend at least KD700,000 ($2.6m) on design fees and submit a KD10m bid bond, despite the absence of a full cost-benefit analysis or reliable projected profits.

Failure to reach an agreement, and an investigation by the State Audit Bureau, led to the award of the management contract being delayed indefinitely.

Bureaucratic wrangling has also been an ongoing feature in one of Kuwait's pivotal but protracted infrastructure developments: the Subiya causeway. This bridge is set to become one of the region's most important infrastructure projects, connecting Kuwait City with the planned City of Silk (Madinat al-Hareer).

In November 2007, the municipality approved designs for the City of Silk, which it was hoped would accelerate progress on the causeway, which has been delayed for four years.

Mohamed Ali, regional director for the project's consultant, Denmark's Cowi, announced at the Kuwait conference that bids for the latest design of the Subiya causeway could be called for by the end of the summer. The construction contract had previously been expected by the end of 2007.

Design changes

The multi-billion-dollar project has been delayed for more than four years, because of environmental concerns and design alterations. These include the planned route of the causeway, height adjustments and span size.

“We hope to finish the final design within six months and expect to start the prequalification or tendering process before September,” says Ali.

In January, the cabinet approved a revised plan for the causeway to restore its original planned height to 23 metres. Under the previous plan, the height of the causeway was raised to 60 metres to allow large vessels travelling to and from Doha port to pass underneath. The changes are expected to take about four months to comply with the revised design.

Ali says the budget for the project now stands at KD600m ($2.2bn), and the work will take three years to complete.

A new prequalification process for the scheme may be required, as nearly two years have passed since the original shortlist of eight global consortiums was announced, and it is not clear if the original groupings still stand.

Kuwait has seemingly recognised the factors that could hinder its progress and is taking steps to address them. Scepticism from local contractors is warranted, but greater freedom for developers is a significant move for the state, which could result not only in suspended projects getting the go ahead, but may also ensure future projects will be run far more efficiently.

With projects on the scale of the City of Silk, such changes are essential.

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